Restricted Stock Plans

Key Provisions

• Outright grants of shares to employee with restrictions as to sale transfer and pledging
• Restriction lapse over a period of time (e.g. 3 to 5 years)
• As restrictions lapse, executive has unrestricted shares which he or she may sell, transfer or pledge
• If employee terminates employment all unvested shares are forfeited
• During restriction period, executive receives dividends and can vote the shares
• Stock is subject to forfeiture if restriction is not met.

Tax Impact on Employee

• At grant - no tax
• As restrictions lapse - the current market value of vested shares taxed as ordinary income subject to maximum tax rate
• At sale - assuming stock is held for 6 months after vesting, gain receives long-term capital gains treatment
• Dividends taxed as ordinary income subject to maximum tax rate
• Any increase after tax is capital gains.
• May qualify for IRC Section 83(b) with possible discount of FMV.

Tax Impact on Company

• At grant - no tax deduction
• As restrictions lapse - company receive tax deduction equal to employee's ordinary income
• At sale - no tax deduction
• Dividends paid during restriction period are deductible by company when paid
• Fair market value at grant charged to earnings during restricted period.

Advantages

• No employee investment required
• Promotes immediate stock ownership
• Charge to earnings is fixed at time of grant
• Excellent retention value
• Employee insulated against the vagaries of the stock market; receives stock regardless of market value
• Granted after performance rendered.

Disadvantages

• Charge to earnings
• Immediate dilution of EPS
• Executive incurs tax liability before shares are sold
• No capital gains opportunity until restrictions lapse
• If stock depreciates, company's fixed earnings charge could exceed tax deduction

What does this mean for THE COMPANY?

1. Restricted Stock provides THE COMPANY with an additional motivational tool for employees.
2. Charge to earnings is fixed at the time of the grant.
3. THE COMPANY employees incur tax liability when restriction lapses.
4. If THE COMPANY's stock depreciates, the Company's fixed earnings charge could exceed tax deduction.

KEY PROVISIONS	TAX IMPACT ON EMPLOYEE	TAX IMPACT ON COMPANY	EARNINGS IMPACT	ADVANTAGES	DISADVANTAGES
Outright grants of shares to employee with restrictions on sale, transfer, and pledging Restrictions lapse over a period of time (e.g., 3-5 yrs.) As restrictions lapse, employee may sell, transfer or pledge All unvested shares are forfeited at termination During restriction period, employee receives dividends; can vote the shares	At grant - no tax deduction As restrictions lapse, the current market value of vested shares taxed as ordinary income subject to maximum tax rate At sale - assuming stock is held for 6 months after vesting, gain receives long-term capital gains treatment Dividends taxed as ordinary income subject to maximum tax rate	At grant - no tax As restrictions lapse - Company receives tax deduction equal to employee's ordinary income At sale - no tax deduction Dividends paid during restriction period are deductible by Company when paid	Fair market value at grant charged to earnings over restriction period Subsequent appreciation not charged to earnings Immediate dilution of EPS for total shares granted	No employee investment required Promotes immediate stock ownership Charge to earnings is fixed at time of grant Excellent retention value Employee insulated against the vagaries of the stock market; receives stock regardless of market value	Charge to earnings Immediate dilution of EPS Employee incurs tax liability before shares are sold No capital gains opportunity until restrictions lapse If stock depreciates, Company's fixed earnings charge could exceed tax deduction

 

To find out more on how Compensation Resources, Inc. can help your company with Restricted Stock Plans, please contact us or call us directly to speak with our compensation consultants at 877-934-0505.